The trial of two aides of former Ontario premier Dalton McGuinty is likely to lay bare some inner workings behind the politicized management of Ontario’s power system over the past 10 years
On Monday, the criminal trial of David Livingston and Laura Miller, who served former Ontario premier Dalton McGuinty as chief of staff and deputy chief of staff respectively, convenes in Toronto. They face charges of breach of trust and mischief in relation to the alleged destruction of government files dealing with power plants originally contracted for the Greater Toronto Area. The trial is sure to attract media attention, particularly since another trial related to alleged Election Act violations by prominent Ontario Liberals — Pat Sorbara, Premier Kathleen Wynne’s former chief of staff, and Liberal fundraiser Gerry Lougheed — is going on at the same time.
The Labour Day weekend was a disappointment for many as the last summer holiday featured below-normal temperatures in most of Ontario. The cool weather meant Ontario’s demand for electricity was only 904,000* megawatts (MWh) for the three days.
The “weighted” average of the hourly Ontario electricity price (HOEP) averaged a meagre $6.13/MWh (0.61 cents/kWh), meaning the market value for that consumption was only $5.542 million.
At the same time, however, Ontario was exporting 168,000 MWh (net exports i.e., exports minus imports) to New York, Michigan, etc. at about the same price. Ontario got $1.03 million from the sale of that power, which brought the total market value of Ontario’s consumption and exports to $6.572 million.
If the $6.57 million figure was the true cost of power generation, then Ontario’s ratepayers would have been delighted; however, we know the HOEP makes up only a small portion of the cost. The Global Adjustment (GA) represents the bulk of costs.
What the power REALLY cost
The GA includes the difference between the contracted rate and the market or HOEP value and many other costs. As is the normal process of IESO (Independent Electricity System Operator) they provide a forecast of the GA at the start of each month. For September of this year, it was the highest ever at $127.39/MWh** or 12.7 cents/kWh. Should IESO’s forecast prove correct, the total cost of those Labour Day megawatt hours for September will be $133.52 or 13.3 cents/kWh.
In other words, the 1,072,000 MWh consumed and exported over the three days of the Labour Day weekend had an all-in cost of over $143 million.
Ontario’s ratepayers in the interim were enjoying TOU (time of use) off-peak rates of 6.5cents/kWh meaning they will be billed $58,760,000 (904,000 X $65/MWh = $58,760,000). That $58.760 million plus the $1.03 million from the export of the 168,000 MWh will produce revenue of only $59,793,000.
That leaves a shortfall in the costs of contracted generation of $83,340,440. ($143,133,440 – $59,793,000 = $83,340,440)
The $83 million shortfall for those three days winds up in what is referred to as a “variance” account and is normally reflected in the resetting of the rates semi-annually by the Ontario Energy Board on May 1st and November 1st. The Fair Hydro Act however kicked these costs down the road and will accumulate with all the other shortfalls and reflect themselves in future rate increases.
Still digging the hole
Despite these crazy financials, Energy Minister Glenn Thibeault has not cancelled the renewable energy contracts issued in 2016 that are now chasing their Renewable Energy Approvals from the Ministry of the Environment and Climate Change. The amount of exported power on the Labour Day weekend combined with the 36,000 MWh of curtailed wind power represented more than one-fifth (22.6%) of Ontario’s demand.
Ontario clearly does not need any more intermittent wind power generated out of phase with demand.
Time for the Minister of Energy to brush up on his Grade 6 Math and stop punishing Ontario’s ratepayers.
* Ontario’s demand for the 2016 Labour Day was 1,197,000 MWh
**Hopefully the IESO forecast includes an allowance for curtailed wind which was approximately 36,000 MWh over the three days of the weekend and which Ontario ratepayers pay $120/MWh.
The IESO (Independent Electricity System Operator) released their July 2017 Monthly Market Report several days ago, including Class B ratepayer consumption levels along with the cost of electricity by MWh (megawatt hour) and kWh (kilowatt hour).
Compared to the July 2016 report, it shows Ontario’s ratepayers used 910,000 MWh less (down 7.2%) in 2017 than 2016 (enough to power 100,000 average residential homes for one year) yet the cost* of the electricity generated jumped, from $106.47/MWh (10.6 cents/kWh) to $126.41/MWh (12.6 cents/kWh) or 18.7%!
To put this in context, Ontario’s Class B ratepayers reduced their consumption from 10.495 TWh (terawatt hours) in 2016 to 8.858 TWh (down 15.6%), while Class A ratepayers increased their consumption from 2.284 TWh to 3.062 TWh (up 34.1%). The cost of power consumed by both Class A and Class B ratepayers increased substantially year over year.
The impact on Class B ratepayers is being tempered by the debt being accumulated under the Fair Hydro Act that will eventually result in a new and higher debt retirement charge. Some of the additional costs can be attributed to losses on our export of surplus power increasing its cost from $88 million in 2016 to $105 million in 2017. Wind curtailed (21.3% of potential generation in 2017) costs also increased from $13.2 million to $14.4 million in 2017.
What it means: despite a reduction in consumption of 15.6 %, total costs increased!
Looking at the IESO’s “Global Adjustment Components and Costs” for July 2017, you see that dividing the published Class B costs of the GA for July of $913.4 million by the consumption figure of 8.858 TWh results in a GA cost of $103.11/MWh (10.3 cents/kWh). That cost is $9.71/MWh less than the GA Monthly Market Report of $112.80. The difference of $86 million** in additional costs was allocated to Class B ratepayers for the month of July.
When I saw that apparent difference, I inquired why. What I got back was this:
“Regarding the discrepancy you’ve identified on the Global Adjustment Components and Costs web page, the reason for the difference is because of adjustments between Preliminary Settlement Statements and Final Settlement Statements for previous months. Page 28 of Market Manual 5.5 explains this. The rate as posted in the monthly market report, is not the Class B GA amount divided by TWh. Rather, it is set to cover all payments made through GA including those held in the variance account.”
The “variance account” referenced in the response from the IESO spokesperson is cleared every six months when the Ontario Energy Board (OEB) set future rates and would have been cleared when they reset the new rates under the Fair Hydro Act that applied to Class B ratepayers as of May 1, 2017. As a result of the reply, I undertook similar calculations for other months as a test and all of them wound up within pennies … not the almost $10/MWh difference for July 2017.
What I get from all this is, transparency may not be all it is claimed to be when a mistake is made, or alternately $86 million for one month being billed to ratepayers is considered a rounding error! What is obvious is that “conservation” costs Class B ratepayers a lot of money.
September 3, 2017
* GA (Global Adjustment) + HOEP (Hourly Ontario Energy Price).
The Fair Hydro Act kicked in July 1, 2017: we can now look at the first month of the 25% reduction Premier Wynne and her Minister of Energy Glenn Thibeault, gave us, and determine if the projected costs look reasonable.
The cost forecast for the Act according to the Financial Accountability Office (FAO) of Ontario, was: “the Province is proposing to borrow an estimated average of $2.5 billion per year through 2027 to pay a portion of electricity costs, thereby temporarily reducing the amount paid by eligible ratepayers. The Province would recover the borrowed funds, including interest, from ratepayers over an estimated 18-year period starting in 2028.”
The FAO’s estimate includes: the 8% provincial portion of the HST, the reduction of 17% in electricity costs and the additional 6% promised to 800,000 rural customers (principally Hydro One ratepayers) who will pay less. The latter is related to taxpayers picking up the costs of the RRRP (rural and remote rate protection plan) and the OESP (Ontario Electricity Support Program) under the Fair Hydro Act.
While the estimate by the FAO for the deferral appears significant at $189 million per month* (plus interest), it may turn out to be much higher, based on what we see in the very first month.
The first month’s deferral has been reported by IESO as $394.7 million. According to IESO it includes adjustments for May ($110.2 million) and June ($136.6 million) that represent the “partial reduction” granted by the OEB to “eligible customers.” That puts the monthly costs for July 2017 at $147.9 million.
The IESO spokesperson also noted due to billing cycles of the various local distribution companies (LDC), the full monthly cost will not become evident until August submissions are made by the LDC.
The $147.9 million will obviously be higher in the months and years ahead and well exceed the FAO’s estimates. For example, the July deferred GA amount would not include monies related to the different billing cycles, or include the 8% provincial portion of the HST. Making a calculated guess, these would add another $100 million, meaning the monthly cost will be approximately $250 million or $3 billion annually. As well, the OEB April 30, 2017 RPP (regulated price plan) report noted rates would have increased 3.1% May 1st had the Fair Hydro Act not altered normal procedures.
The 3.1% increase mentioned in the OEB report becomes clearer from this report excerpt: “After taking into account the reduction in the forecast amount of the Global Adjustment of approximately $1B, the average supply cost drops by $13.79/MWh relative to May 2016 prices, or $17.28/MWh relative to what RPP consumers otherwise would have paid starting on May 1, 2017.”
That 3.1% increase we avoided (deferred) and other rate increases approved by the OEB over the next several years will also be deferred, but accrued to appear on our future electricity bills.
Hydro One alone has nine rate applications either before the OEB or in the hopper, so we should expect a future whiplash from rate increases that will make the recent past look good!
And to think we thought the gas plant moves were costly!
August 27, 2017
* The FAO chart 6-1 estimates a monthly impact of $41.00 per “average” residential ratepayer per month so the math equation is: $41.00 X 4,612,551 residential ratepayers (OEB Yearbook of Distributors for 2016) = $189,114.591 or $2.3 billion annually plus interest.
The power monopoly claimed its advice influenced the Wynne government decision to lower electricity bills. What did the government really hear?
A year ago I wrote an article titled: “And the winner is: Hydro One! Most expensive residential power rates in North America” and it was posted on my new blog. The “most expensive” was a reference to what are classified by Hydro One as “low-density clients”. The article itself drew thousands of viewers, dozens of links to other sites, and may have partially influenced a focus on Hydro One and hydro rates in general by the mainstream media.
On September 12, 2016 Premier Wynne’s government suddenly acknowledged rates were too high and announced the 8% provincial portion of the HST would no longer be charged on residential hydro bills.
The 8% was estimated to cost $1 billion dollars in lost tax revenue, but was a drop in the bucket when measured against the 100% plus rate increases occurring since the Liberals gained power. The pressure to do more built up and because it was top of mind on the list of voter concerns, the Wynne government declared they would do more.
On March 2, 2017 Premier Wynne announced the Fair Hydro Plan declaring, “I have heard from people around the province who are worried about the price they are asked to pay for electricity and the impact it has on their household budget. Electricity is a necessity.”
The Plan was to reduce residential bills by 25% (including the 8% Provincial tax) by deferring the costs of the reduction for four years. The debt generated would accumulate on the books of OPG and become a rate increase five years hence. What the Plan really does is discard accepted accounting standards! Once the “Plan” turned into an “Act,” local distribution companies were duty bound to make announcements. Hydro One was particularly gushy as noted in a bill insert: “Our customers have been telling us that their electricity bills are too high. That’s why we advocated to government on their behalf for a more fair and affordable electricity bill.”
This insert also informed their monopolized customers, “the majority of our customers will see an average reduction of 31 per cent on their monthly bills, meaning an annual savings of about $600.”* The “asterisk” identifies a “majority” customer as one who consumes an average of 750 kWh monthly.
Now to explain why “average” Hydro One customers will see a 31 per cent reduction instead of the 25% touted by Premier Wynne and her Energy Minister, Glenn Thibeault! The first element is the Ontario Electricity Support Program (now taxpayer’s responsibility) and the second is the RRRP or Rural and Remote Rate Protection Plan. Collectively, these two costs added close to $400 million to Hydro One’s delivery line on our bills and presumably make up the additional 6% reduction low-density and medium-density clients will experience.
As you can guess, Hydro One is happy. Taxpayers will pay a part of their bad debt allowances.
To suggest they influenced the decision when their low and medium density ratepayers were screaming is a bit disingenuous: the votes from those ratepayers was what Premier Wynne and Energy Minister Thibeault really heard.
Hydro One’s rates are still the highest in Canada and in five years those deferred costs* will force them even higher!
* A minimum of $25 billion for the whole province.
Reading the news releases since Hydro One was privatized by the Wynne government one would think the company is trending up. A rate-paying customer, or even an early investor in Hydro One shares, however, might not agree, especially with some recent claims in their second quarter news release.
Right after Hydro One announced plans to spend $6.7 billion (CAD) to acquire Avista Corporation of Spokane, Washington, credit rating agencies Moody’s and Standard and Poor’s revised their outlook to “negative” from stable, citing concern about cash flow and increased debt. Fast forward to August 8, 2017 and the second quarter results demonstrated more negative news as earnings dropped $34 million (21.7%) to $123 million or 20 cents per share. Back on May 4, 2017 Hydro One had increased their dividend payment to 22 cents per share so they paid out $135 million in the Q2, or $12 million more than their after-tax income.
I wonder how long the credit rating agencies will allow that to happen without a downgrade.
It appears that management of Hydro One at least recognized the “outlook” downgrade as, buried in the notes in their Q2, was this : “The change in the capital structure of Hydro One as a result of the Merger and the Debenture Offering could cause credit rating agencies which rate the outstanding debt obligations of Hydro One and Hydro One Inc. to re-evaluate and potentially downgrade their current credit ratings, which could increase the Company’s borrowing costs.”
The news release also featured this back-pat from president and CEO Mayo Schmidt, despite the bad news of the quarter and the potential of an upcoming credit downgrade: “We continued to deliver on enhancing customer satisfaction and value while implementing operational improvements and efficiency gains across the organization, despite unseasonably mild weather during the second quarter.”
Not too bright a future
So, let me get this straight: a possible credit downgrade, higher borrowing costs, declining income and lower demand — those don’t add up to “enhancing customer satisfaction and value.” And, with nine rate applications to be filed in the next four years, the future doesn’t look great for Hydro One’s customers.
Hydro One’s distribution revenues (net of purchased power) were flat at $349 million compared to the same 2016 Quarter. However, they actually delivered 4.5% (276,000 MWh) fewer MWh. What that means is Hydro One’s distribution rates for their most recent quarter were 4.5% higher than the comparable quarter in order to make up for the lower demand while maintaining revenue levels.
To make matters worse, the takeover of Avista will put Hydro One into the coal business facing a $100 million dollar cost of cleaning up a toxic waste site partially owned by Avista in Montana.
Effective management and efficiency gains, coupled with lower distribution rates should be the focus for Hydro One before they get to claim they are “enhancing customer satisfaction.” As well, claiming that electricity rates are lower by actually deferring costs for four years via the Fair Hydro Act just proves Hydro One’s existence as a monopoly should be controlled, rather than allowed to spin tall tales.
Rick Conway of the Wellington Times in his editorial of August 16th has done a great job at highlighting the way the current government of the province have messed up the electricity sector and how they are trying to increase the mess.
He points out how we are exporting our surplus power, in part due to the unreliability of wind and solar generation.
He has kindly referenced yours truly in the article and it is much appreciated.